What Is a Good Profit Margin? Tips and Target Profit Margins

“Without context, sales numbers don’t mean anything,” says Armine Alajian, founder and CEO of Alajian Group Inc., an accounting firm specializing in startups and business management. “You can have huge sales and still lose money. Show me the numbers: How much did you spend to make that sale?”

What Armine is referring to is profit margin—and knowing what counts as a good profit margin is essential for any business owner. Profit margin is the percentage of sales retained by the company as profit, after accounting for your costs. That depends on your industry, business model, and cost structure. Understanding your company’s profit margin is essential, because higher profit margins give you more financial resources to expand your operations, hire employees, improve your products, and more. 

This article breaks down the three types of profit margins, explains what counts as a good margin in different industries, and shares strategies for improving yours.

What is a profit margin?

A profit margin is the measure of profitability for an overall business, or a specific product or service. The measure is typically expressed as a percentage, showing how much money is left after subtracting costs from revenue; the higher the number, the more profit the business makes relative to its costs. For example, a 10% profit margin means the business keeps 10¢ of every dollar in sales.

Some entrepreneurs focus on their top-line sales, but it’s the final profit that determines what you have left to reinvest in your business—and to pay yourself. A business could have an impressive $100 million in sales, but if it cost $101 million to make those sales, the company is unprofitable and might fail unless it boosts sales, cuts costs, or both.

3 types of profit margins

1. Gross profit margin
2. Operating profit margin
3. Net profit margin

There are several types of profit margins. Three of the most commonly used financial metrics that measure a company’s profitability are its gross, operating, and net profit margins:

1. Gross profit margin

Gross profit margin reveals how efficiently a company makes its products or delivers its services. It measures how much revenue is left after subtracting the cost of goods sold (COGS) from revenue. COGS includes direct costs for raw materials, packaging, and direct labor—labor costs specifically related to manufacturing, selling products, or delivering services. 

The gross profit margin formula is:

[(Net sales - Cost of goods sold) / Net sales] x 100 = Gross margin

For example, if an apparel retailer’s quarterly net sales is $10,000 and COGS is $6,000, the difference between the two is $4,000. Divide that difference by the $10,000 in sales, and multiply by 100.

[($10,000 - $6,000) / $10,000] x 100 = 40 

The resulting 40% is the company’s gross profit margin.

Calculating gross profit margin shows how efficiently a business manages inventory and production costs; a low gross margin might mean the business needs to adjust inventory strategy or negotiate better deals with suppliers. But this figure has limitations.

“A good gross profit margin doesn’t necessarily mean you’re profitable,” Armine says. “I see this a lot with ecommerce founders: They get excited about all the sales they made, but then they’re confused about why they’re losing money.” That’s where operating and net profit margins come in.

2. Operating profit margin

Operating profit margin demonstrates the strength of your day-to-day operations and how well you manage these costs. It’s similar to gross margin in that it measures revenue against cost of goods sold, but it also includes operating expenses like rent, office supplies, and software. These costs aren’t directly related to making your products or delivering your service, but they are necessary for running your business.

To find your operating margin, you first need to calculate your operating income, which is total sales (or total revenue) minus COGS and all operating expenses (including non-cash costs like depreciation and amortization, which spread the cost of assets over time). 

Then apply this operating profit margin formula:

(Operating income / Total revenue) x 100 = Operating margin 

For example, say a skin care startup generates $50,000 in sales with $27,000 in COGS and incurs $15,000 in operating expenses (including $7,000 in rent and utilities, $6,000 in marketing, and $2,000 in administrative costs).

Operating income = $50,000 - $27,000 - $15,000 = $8,000

($8,000 / $50,000) x 100 = 16% Operating margin

The next step is to strip out all costs.

3. Net profit margin

Net profit margin measures a company’s final profit, typically shown on the last line in an income statement and informally referred to as the bottom line. This metric comes as close as possible to summing up your business’s financial health in a single figure. 

Net margin considers all the costs and business expenses, including COGS, operating expenses, taxes, and interest. It shows whether your business is generating enough profit from sales—or if materials and other operating expenses are holding you back.

To calculate this, use the net profit margin formula below (or plug this information into a profit margin calculator): 

(Net income / Total revenue) x 100 = Net profit margin

Say your gross sales are $90,000 and your expenses are $82,000. That means your net income is $8,000. The formula shows: 

($8,000 / $90,000) x 100 = 8.8%

Your net profit margin is 8.8%, meaning your business retains almost 9¢nine cents of every dollar in sales.

What is a good profit margin?

A good profit margin depends heavily on the industry. Speaking broadly, the average gross profit margin for retail ranges from 30% to 50%, and average net profit margins range from 2% to 10%.

A comprehensive Forrester study that analyzed US retail sales and profit trends from 2001 to 2022 found that average profit margins remained relatively stable during this period, at about 2.8% to 3.5%. That stability suggests retail margins are structurally tight, which makes cost management especially critical for retailers aiming for above-average profitability.

Those numbers look very different outside retail. Companies like real estate investment firms, insurance brokerages, and gold miners may have net profit margins of nearly 20% to 30%.

Industries with higher and lower margins

Businesses that tend to have higher net profit margins include:

• Luxury retailers that mark up their retail prices in the name of exclusivity

• Software and video game developers, which invest heavily in developing their products but enjoy a high profit margin because it costs little to make each copy

• Drug and medical equipment makers, which can sell patent-protected devices and treatments at a significant profit

A higher profit margin is almost always better, but a lower profit margin doesn’t necessarily mean a company isn’t making money. Many businesses offset lower profit margins through high sales volume.

Sectors with a lower average net profit margin include:

• Grocery stores, which have lots of competition that keeps prices lower

• Restaurants, which have significant overhead expenses, including labor and food costs

• Brick-and-mortar stores, which often pay a lot of overhead in the form of rent and labor

Your business model, pricing strategy, and cost management play key roles in achieving a healthy profit margin. Armine recommends researching business profitability ratios in your industry—you can look at the financial statements of public companies to get a general idea and buy reports from analysts. However, she warns not to obsess over the ideal profit margin based on what other businesses do.

“It’s a benchmark, not an absolute number you must hit,” Armine says. “All these numbers are different for everybody. Maybe your sales are lower than your competitor’s, but you have technology that reduces indirect expenses, so you’re more profitable.”

How to improve your profit margin

• Build a plan based on accounting
• Make projections to adjust pricing, discounts, and product mix
• Strategize and negotiate to reduce fixed costs
• Pay attention to operating expenses, and don’t be blinded by sales growth

Higher profit margins give you more financial resources to expand your business. If yours are too low, you can use several strategies to increase them. Most approaches focus on boosting sales, reducing costs, or, ideally, both. Here are a few ways to increase your profit margin:

Build a plan based on accounting

Build a rigorous accounting-based system that continuously monitors your business’s financial condition. Making the right decision depends on having actionable information readily available. Armine recommends working with an expert to develop a plan that you review quarterly.

“Accounting is a number-one need. It’s not a nice-to-have, it’s a have-to-have,” she says. “When you know exactly where your money is going, that’s how you see patterns and find ways to improve or expand.”

Make projections to adjust pricing, discounts, and product mix

Make realistic projections for the future and consider different options within pricing strategy and product mix. This can help you find the optimal mix for increasing your profit margins.

“When you build out projections, it can serve as a live model for considering different options,” she says. “You can try different things out and see how it changes the numbers.” Build projections based on your current costs and revenue, then see how the model responds when you make adjustments: How would a price increase affect your profit margin? Could offering a discount bring in enough additional business to offset the lower price?

Strategize and negotiate to reduce fixed costs

In addition to boosting revenue, Armine recommends analyzing fixed and recurring costs, like supplier bills and rent, to make reductions that create the greatest impact. 

Her tips: Get price quotes from other manufacturers to see if you can get a better deal elsewhere. Negotiate bulk pricing with suppliers as your orders grow larger. Consider downsizing a large office space to save on rent. Outsource fulfillment rather than hire full-time staff.

Pay attention to operating expenses, and don’t be blinded by sales growth

Controlling operating costs is as important as sales in achieving overall profitability, Armine says. “It’s easy for startups to get tied up in sales, but that’s when other things get overlooked,” she says. “Accounting for interest payments on loans, tax bills, and rent checks might not seem as exciting—but accurately measuring profitability is what makes it possible for your business to achieve all that you want to do.”